It’s the end of the world we’ve known since WWII (updated status report)

Summary: This is an updated status report about the end of the post-WWII world. The global recession has accelerated the transition, revealing the current order’s weaknesses, and showing the people in the emerging nations that they have outgrown it. The major nations continue to defend the current systems, a futile effort wasting time and resources that could be better spent adjusting to the new world now evolving. This post updates previous posts in this series; links appear at the end.

By S. D. Siegel

Contents

Decline follows the peak, as night follows day

What happens next?

Can we predict the form of the new world order?

For more information

(1) Decline follows the peak, as night follows day

The post-WWII era peaked in the 1990s, with the end of the Soviet Union in 1991, the crushing of the emerging nations in 1997-98 (leading to their search for new systems), and the trough of WTI crude oil at $12 in 1998.

Decline started soon after, resulting from structural flaws in the major nation’s political processes. Symptoms include:

growing domination of the financial sector in the politics of US and Europe (eg, the failure of regulators to rein in the technology and housing bubbles before they burst),

the ill-designed stage 3 of the European Monetary Union started in 1999,

Bush Jr’s tax cuts in 2001 and 2003 undercut the solvency of the US government,

the US reaction to 9-11: the War on Terror’s massive changes to America’s internal political regime and external grand strategy, and

the major nation’s inability to craft effective energy policy in response to the first signs of global oil production peaking (eg, rising oil prices).

The decline so far consists of two sets of interrelated dynamics. First, a reversion to the mean of history: the center of economic power returns to the East, ending a few hundred year long aberration.

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The economic and political regimes of the developed nations (US, Japan, Europe) are failing under pressure of accumulated debt, aging demographics, and their accumulated public policy errors (described above).

Growth in the Emerging Nations (EM’s) continues, closing the gap with the major nations, as they adopt modern social and technological patterns.

Second, the foundations of the post-WWII’s geopolitical and financial regimes are washing away (we cannot yet see what will replace them):

So far people remain calm, even in the worst-affected regions (doomed Japan and broken Europe). The emerging nations remains confident (probably due to their strong growth since 1998). The US remains confident, sustained by its trillion-dollar annual borrowing by the Federal government — money burned to support the economy, wasted with no long-term benefits. This calm can change suddenly, replaced by panic or aggression. Increased volatility seems certain, either way.

More specifically what can we expect?

(a) Stressful politics, and policy errors

Stress affects political systems just as it does individuals.Decision-making usually degrades (unless we have great leaders), resulting in policy errors. We become defensive, less generous — and define “us” more narrowly. Internally, politics might become factious zero-sum battles. International tensions also will increase. We’ll rely on the existing global institutions, however inadequate, since their drastic reformation (or replacement by new ones) will come only at the end of the transition — marking the birth of a new world order.

Fortunately the era of State-State war has passed, so large-scale military action remains unlikely, despite the mad cheering war-mongers. But small wars and 4GWs (aka low-intensity conflicts) might become more common.

(b) Continued low inflation

The US government has thrown a “Hail Mary” pass (i.e., QE2, perhaps to be followed by QE3) to prevent a deflation potentially lethal for a high-debt economy like ours. Despite years of confident, politically useful, but failed predictions of rising interest rates and inflation, many remain hysterical certain that we’re a Weimar-in-the-making. This is typical of the confusion brought about by transitions. People run about with fire extinguishers while their house floods. We face challenges like those of 1931 and 1937, but crowds see only 1921.

(c) Expensive oil (ie, liquid fuels)

Global growth, from the EM’s, is slowly boosting oil consumption. At some point, peak oil will further complicate our lives. When this happens depends on investment decisions (especially in OPEC), global growth, and geological constraints. Already the precursor to peak oil, falling EROI (energy return on investment), is pushing up energy prices — offset by improved technology which lowers the cost of exploration and production.

We’ve passed the first marker: political peaking in 2008, when the Saudi Princes decided not to further expand production capacity (see details here). At some point production in the Saudi’s Gwahar field will begin its long decline. On that day world production peaks, for we cannot replace the resulting 10-15% (500,000-plus barrel/day) production lost each year. Only the Saudis, and perhaps the CIA and SVR (formerly KGB), know when that might happen. Or not, as peaking tends to occur unexpectedly — recognized, as in the North Sea and Cantarell, only afterwards.

What happens as demand increases but production does not? Oil prices must rise to destroy the excess demand. Since oil demand is inelastic with respect to prices, prices must rise a lot to destroy demand. Spikes in energy price rises are deflationary (as we saw in 2008), unless central banks (CB’s) respond with monetary easing (as they did in the 1970s). CB’s of emerging nations experiencing the inflationary effects of rapid growth are unlikely to ease and exacerbate the inflation. CB’s of most developed nations may be unlikely to do so under current conditions, for different and complex reasons.

Peaking during the current crisis would have painful effects for all the oil-consuming nations.

(d) How long will the transition take?

Large transitions take one to two generations. The long peace (1815-1914) was the greatest period of peace and prosperity in recorded history. The transition which followed, 1914-1945, was painful. Poverty during the Great Depression, megadeaths from two world wars and several civil wars, and a plague (the 1918 flu).

(3) Can we predict the form of the new world order?

“Choice. The problem is choice.”
— Neo in “The Matrix Reloaded”.

We have entered a singularity. We cannot reliably guess about the pace of the transition through it and what lies beyond, despite the gurus who make confident predictions. Some speak as if they read the 2100 AD Britannica. Others seem to channel Hari Seldon (see Wikipedia), as if societies evolve according to economic theories. They deny agency to the people who are the reality comprising those abstract “societies” and “nations”, and ignore the immaterial factors that knit powerless individuals into a collective will.

The future results from the choices we will make, individually and collectively. Some of these we can foresee, some will be unexpected. But until the moment of decision arrives we do not know how we will decide — let alone how other peoples will decide.

Today complacency is a delusion – or an enemy, encouraging us to waste our most valuable resources: time.

Once through this transition we’ll confront new challenges: demographic transitions (rising then falling populations), climate change, resource scarcity, the robot revolution (the next wave of automation), and others yet unimagined. The end of history may lie in our future, but not soon.

“Therefore, mankind always sets itself only such tasks as it can solve; since, looking at the matter more closely, we will always find that the task itself arises only when the material conditions necessary for its solution already exist or are at least in the process of formation.”
–- Preface to A Contribution to the Critique of Political Economy by Karl Marx (1859)

I do not read enough about the major realignment of trade taking place. Everybody and his brother are looking for the Asian trade. If Europe succeed to participate in the Asia trade, it will go on thriving. The USA rulers are reluctant to adjust to a sinking GDP in the future. I do not talk to Asian bigwigs, so I watch the credit, the USA gets, to see their attitude. So far so good.

Much depends on currency movements. Europe’s external trade is growing from their weakening of the Euro, as has America’s (and those nations who link to the dollar, like China) from the decline during the past decade.

Also, there are signs that Asian growth is slowing fast. Especially India and China.

An analysis of the export boom’s effect on the US economy: “The Great American Mirage“, Stephen S. Roach (economist), Project Syndicate, 27 June 2012. Remember, not everybody can have export-led growth. Excerpt:

Since the first quarter of 2009, when the US economy was bottoming out after its worst postwar recession, exports have accounted for fully 41% of the subsequent rebound. That’s right: with the American consumer on ice in the aftermath of the biggest consumption binge in history, the US economy has drawn its sustenance disproportionately from foreign markets. With those markets now in trouble, the US could be quick to follow.

Three regions have collectively accounted for 83% of America’s export-led growth impetus over the past three years – Asia, Latin America, and Europe. (Since regional and country trade statistics assembled by the US Department of Commerce are not seasonally adjusted, all subsequent comparisons are presented on the basis of a comparable seasonal comparison from the first quarter of 2009 to the first quarter of 2012.)

Not surprisingly, Asia led the way, accounting for 33% of the total US export surge over the past three years. The biggest source of this increase came from the 15-percentage-point contribution of Greater China (the People’s Republic, Taiwan, and Hong Kong). Needless to say, China’s unfolding slowdown – even under the soft-landing scenario that I still believe is most credible – is taking a major toll on the largest source of America’s export revival. The remainder of the Asian-led US export impetus is spread out, led by South Korea, Japan, and Taiwan – all export-led economies themselves and all heavily dependent on a slowing China.

Latin America provided the second-largest source of America’s export resurgence, accounting for another 28% of the total gains in US foreign sales over the past three years. Brazil and Mexico collectively accounted for 19 percentage points of that increase. Growth in both economies is now slowing significantly, especially in Brazil. But, given the close linkages between Mexican production and US consumption (which is now sputtering again), any resilience in the Mexican economy could be short-lived.

Finally, there is the sad case of Europe, which has accounted for 21% of the cumulative growth in US exports over the past three years.

… . Since the second quarter of 2009, US annualized real GDP growth has averaged 2.4%. With roughly 40% of that increase attributable to exports, that means the remainder of the economy has grown at an anemic 1.4% pace.z

I am very pleased to see that you have resumed the practice of allowing others to comment on this wonderful blog (first time back since the ‘cut off’).

Would it be better if we allowed everyone to exchange commodities instead of a single fiat? For example: a note for gasoline, a note for coffee, a note for blah blah (sorta like gift cards for everything?). Exchange rates would be determined by supply/demand of the commodities and the people would have more control over the system (rather than the bankers). More like the Austrian school instead of the Keynesian.

You have stumbled upon an idea first conceived by the great Projectors, the innovative scholars at The Grand Academy of Lagado in the land of Laputa (Gulliver’s Travels, part III):

However, many of the most learned and wise adhere to the new scheme of expressing themselves by things; which has only this inconvenience attending it, that if a man’s business be very great, and of various kinds, he must be obliged, in proportion, to carry a greater bundle of things upon his back, unless he can afford one or two strong servants to attend him. I have often beheld two of those sages almost sinking under the weight of their packs, like pedlars among us, who, when they met in the street, would lay down their loads, open their sacks, and hold conversation for an hour together; then put up their implements, help each other to resume their burdens, and take their leave.

But for short conversations, a man may carry implements in his pockets, and under his arms, enough to supply him; and in his house, he cannot be at a loss. Therefore the room where company meet who practise this art, is full of all things, ready at hand, requisite to furnish matter for this kind of artificial converse.

Another great advantage proposed by this invention was, that it would serve as a universal language, to be understood in all civilised nations, whose goods and utensils are generally of the same kind, or nearly resembling, so that their uses might easily be comprehended. And thus ambassadors would be qualified to treat with foreign princes, or ministers of state, to whose tongues they were utter strangers.

Very thought-provoking article. I’ve long considerred what might come next for the geopolitical order, but it’s difficult to see through the singularity. Maybe ‘Fabius particles’ will help us to see bits and pieces.